Apple CEO Defends Tax Practices as Proper

WASHINGTON—
Apple
Inc.
Chief Executive
Tim Cook
defended the technology giant's tax practices in front of Senate investigators on Tuesday, arguing the company pays all taxes due and that its use of foreign subsidiaries doesn't affect its U.S. tax bill.

Mr. Cook's appearance on Capitol Hill followed the disclosure his company has paid no corporate income taxes on tens of billions of dollars in overseas income during the past four years, according to a report from the U.S. Senate's Permanent Subcommittee on Investigations released Monday.

Sen.
Carl Levin
(D., Mich.), chairman of the panel, accused Apple of employing "alchemy" and "ghost companies" to escape tax collectors in the U.S. and Ireland, the base of the firm's international operations outside the Americas.

"Apple has sought the Holy Grail of tax avoidance," said Mr. Levin said. "Apple is exploiting an absurdity, one that we have not seen other companies use."

Countered Mr. Cook: "There's no shifting going on…We pay all the taxes we owe, every single dollar."

Apple CEO Tim Cook details upcoming investments that the company is making within the U.S., including $100 million dollars for a new line of Macs to be made in Texas.

Apple used technicalities in Irish and American tax law to pay little or no corporate taxes on at least $74 billion over the past four years, according to the Senate panel's findings. The investigation found no evidence that Apple did anything illegal. Aides to the subcommittee said they have never seen a company use a subsidiary that didn't owe corporate income taxes to any country.

Apple didn't dispute that entities it set up didn't pay corporate taxes but denied they were designed to avoid taxes. The company said it pays local taxes on overseas earnings and U.S. taxes on investment income generated at its Irish subsidiaries.

The company pointed to the "extraordinary" amount of corporate income taxes it pays—$6 billion in 2012—and said its U.S. effective federal cash tax rate was 30.5% last year, not much below the 35% statutory rate.

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"What they often leave out is the second part of the story, that Apple is one of the largest tax avoiders," said Sen.
John McCain
(R., Ariz.), who described Apple as the "most egregious offender" among U.S. corporations trying to avoid tax bills. Mr. McCain is the top Republican on Mr. Levin's panel.

On Tuesday, Mr. McCain quipped that the Cupertino, Calif., company gave new meaning to its slogan "think different."

Still, Mr. Cook appeared to have some success in charming lawmakers with his in-person appearance. He repeatedly flashed a thumbs-up to onlookers taking pictures with iPhones. Some senators went out of their way to note how much they enjoy using Mr. Cook's products.

When the CEO introduced himself to Sen.
Kelly Ayotte
(R., N.H.), she responded, "Nice to meet you. I have an iPad."

Still, the hearing further highlighted how corporate CEOs and policy makers agree the U.S. tax code is in dire need of a makeover. The system needs a "dramatic simplification" that would be revenue neutral, eliminate corporate tax expenditures, lower overall tax rates and make it easier to bring money back from overseas, Mr. Cook said Tuesday.

He added that he would like a top corporate tax rate in the "mid-20s" and a repatriation rate in the "single digits."

Many of those proposals have bipartisan support in Washington. But the two sides sparred over whether Apple is abusing the current system.

Kentucky Republican Sen. Rand Paul, who is considering a 2016 presidential bid, said the gathering amounted to a "show trial" since it is expected to produce no policy.

A corporate executive would be fired if he or she passed up known ways to reduce taxes, said Mr. Paul, a tea-party favorite.

The subcommittee has previously taken
Hewlett-Packard
Co.
to task for setting up chains of short-term loans to make use of its foreign subsidiaries' cash at home without paying taxes. It has also called
Microsoft
Corp.
out for shifting intellectual property—and the income that follows—to subsidiaries in Singapore, Ireland and Puerto Rico.

As with Apple, the companies' moves are legal, and H-P and Microsoft have said they comply fully with tax laws.

The Senate panel's new report focuses on Apple units in Cork, Ireland, where Apple has long based its operations for Europe, the Middle East, India, Africa, Asia and the Pacific. The units are beyond the reach of the Internal Revenue Service, which counts corporations as American if they are incorporated in the U.S.

Irish tax law only considers companies residents if they are managed and controlled there, and Apple manages them from the U.S.

The result: Apple pays little or no taxes to either country on much of its revenue earned outside the U.S., according to the report.

One of the units, Apple Operations International, hasn't filed a corporate tax return anywhere in the past five years, the Senate panel found. The unit is the main holding company for Apple's business outside of the Americas.

"Despite reporting net income of $30 billion over the four-year period 2009 to 2012, Apple Operations International paid no corporate income taxes to any national government during that period," the report found.

Apple told the panel that it doesn't believe Apple Operations International "qualifies as a tax resident of any other country under the applicable local laws."

ENLARGE

Apple Operations International, a subsidiary of Apple Inc., is seen in Hollyhill, Cork, in the south of Ireland May 21, 2013.
Reuters

In 2011, another Ireland-based Apple unit, Apple Sales International, which sells iPhones, iPads MacBooks and other products to overseas distributors, recorded $22 billion in pretax earnings but paid just $10 million in taxes, investigators found. That works out to a rate of about .05%.

A third Apple subsidiary, Apple Operations Europe, also maintains its corporate profits aren't taxable by any country, according to the investigation.

The entities "play an important role in the Company's international business activities," said Apple's written testimony, which added the Irish operations employ nearly 4,000 people. The structure allows Apple to minimize risk and take advantage of scale by having most of its foreign earnings held by one entity.

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